Q1. A company enters into a long futures gold contract to buy 100 ounces of gold
ID: 2817053 • Letter: Q
Question
Q1. A company enters into a long futures gold contract to buy 100 ounces of gold for S1200 per ounce. The initial margin is $3000 per contract and the maintenance margin is $2000 per contract (1) What price change would lead to a margin call? (2) What is the margin call price? (3) What circumstances could $2000 can be withdrawn from the margin account? Q2. A company enters into a short futures gold contract to sell 100 ounces of gold for $1200 per ounce. The initial margin is $3000 and the maintenance margin is $2000. (1) What price change would lead to a margin call? (2) What is the margin call price? (3) What circumstances could $2000 can be withdrawn from the margin account? Nlovober gold futures contractsExplanation / Answer
Q-1)
Answer: The initial margin is the minimum amount one has to deposit to enter into a new futures contract, while the maintenance margin is the least amount an margin account can reach before needing to be replenished, So if margin balance falls below maintenance margin, margin call will be triggered and the trader will have to replenish the amount equal to the difference between Initial margin and balance in margin account.
1) In the given question Initial margin is $3000 and maintenance margin is $2000, and the contract is long(buy) 100 ounces of gold, a margin call will be triggered when margin balance falls below maintenance margin.
Current margin balance = $3000
Maintainance margin = $2000
Margin calls will be triggered when margin balance falls below $2000, thus on 100 ounces of gold contract with current price of $1200 per ounce, a fall above $10 price per ounce of gold will trigger the margin call, thus if the price falls below $1190 per ounce, the margin call will be triggered.
2) Margin call price = Initial margin - current margin balance.
If lets say price falls to $1186, margin account balance would be = $3000 - $1400 (loss of (1200-1186 * 100)) = $1600
Margin call = $3000 - $1600 = $1400
3) $2000 can be withdrawn from margin account only if margin account balance has an excess of $2000 over maintenance margin required, such excess balance can be withdrawn.
Q2)
Answer)
1) In the given question Initial margin is $3000 and maintenance margin is $2000, and the contract is SHORT(Sell) 100 ounces of gold, a margin call will be triggered when margin balance falls below maintenance margin.
Current margin balance = $3000
Maintainance margin = $2000
Margin calls will be triggered when margin balance falls below $2000, thus on 100 ounces of gold contract with current price of $1200 per ounce, a rise in price above $10 price per ounce of gold will trigger the margin call, thus if the price rise above $1210 per ounce, the margin call will be triggered.
2) Margin call price = Initial margin - current margin balance.
If lets say price rises to $1211, margin account balance would be = $3000 - $1100 (loss of (1200-1211 * 100)) = $1900
Margin call = $3000 - $1900 = $1100
3) $2000 can be withdrawn from margin account only if margin account balance has an excess of $2000 over maintenance margin required, such excess balance can be withdrawn.
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